New Instruction D-34 and translation of TP Guidelines

In Financial Bulletin 5/2019, the General Financial Directorate (GFD) published long-awaited Instruction D-34. It replaces existing Instruction D-332 on applying international standards in the taxation of transactions between associated enterprises. At the same time, a Czech translation of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations of July 2017 was published.

The new instruction deals with the following issues, among others:

• The arm’s length principle and its regulation in Czech laws comparative analyses (benchmarking) and factors determining comparability recommendations how to proceed with comparative analyses description of methods to determine transfer prices and their use in practice.
   
• The opening part of the instruction deals with transfer pricing in general, mainly its codification, referring to the revised OECD Guidelines of 2017. The instruction also mentions the BEPS Action Plan published in 2015 by the OECD as a basis for analyses.
   
• The basis for the application of the arm’s length principles is the comparison of conditions in a related-party transaction to those in an unrelated (independent) transaction. According to the tax authorities, any business relationship between associated enterprises, including a parent company’s instruction resulting in a taxpayer’s loss, shall be considered a related-party transaction.

Special attention is paid to the value chain and to risk and functional analyses. A relevant analysis should determine the profile of the enterprise under review, and subsequently the distribution of profits depending on where in the chain of enterprises the value is created.

The instruction contains more detailed recommendations on preparing comparative analyses (benchmarks), including a recommended updating interval: a new analysis should be prepared every three years, while a review of the independence and profitability of selected unrelated enterprises should be carried out on an annual basis. As per common practice, multiple-year data, usually for 3 to 5 years, should be used to determine market ranges. The full wording of Instruction D-34 is available here.

KPMG can prepare full-scope transfer pricing documentation that meets all the above recommendations. If you are not sure whether your present documentation complies with Instruction D-34 or if you wish to have an entirely new transfer pricing documentation prepared, we will be happy to help.